Hoosier Banker 27 Check Fraud Who is liable for a fraudulent endorsement? Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. COMPLIANCE CONNECTION Question: One of our commercial customers has informed us that a $65,000 check he sent via U.S. mail to pay commercial insurance premiums was stolen and signed over to an unrelated third party. The third party deposited the check in another bank, and our bank paid it when presented. The customer learned of the fraud when the insurer GSRXEGXIH LMQ JSV RSRTE]QIRX ERH LI TVSQTXP] RSXMƤIH us. He now claims we must replace the funds in his account and is threatening to sue us if we do not do so [MXLMR LSYVW ;LEX EVI SYV VMKLXW YRHIV -RHMERE PE[# Answer: Determining who is responsible for the loss in check fraud cases, regardless of the size of the loss, is a fact-sensitive analysis. You describe a scenario in which the check was not forged, but instead fraudulently endorsed to a third party. While the fraudster is ultimately responsible for any loss, typically the fraudster will have disappeared, in this case along with the $65,000 in stolen funds. As a starting point, banks may only charge an item against a customer’s account if it is “properly payable,” meaning the charge is authorized by the drawer. In the case of a fraudulent endorsement, clearly the drawer intended to pay his insurance carrier, not the mail thief who received the funds. The bank that cashed the check with this forged endorsement (the “collecting bank”) transferred it to your bank along with certain transfer warranties under Indiana law, including that: (1) the warrantor is, or was at the time the warrantor transferred the draft, a This information is provided for general education purposes and is not MRXIRHIH XS FI PIKEP EHZMGI 4PIEWI GSRWYPX PIKEP GSYRWIP JSV WTIGMƤG guidance as to how this information applies to your institution’s circumstances or situation. 1Ind. Code § 26-1-4-208(a) 2Ind. Code § 26-1-4-208(b) person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (2) the draft has not been altered; (3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized; and (4) with respect to a remotely created consumer item, the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.1 The obligation of a transferor is owed to the transferee and to any subsequent collecting bank that takes the item in good faith.2 Your bank took the item in good faith, subject to the transfer warranties under Indiana law, and may recover damages from the collecting bank for its breach of warranty in an amount equal to the loss suffered as a result of the breach, but not more than the amount of the item plus expenses and loss of interest incurred as a result of the breach. While cases like this often begin with all involved asserting the “other bank” is responsible, generally once the facts are explained to someone at the collecting bank with knowledge of the Uniform Commercial Code, all parties can focus on pursuing the party responsible for the fraud. Note that UCC check fraud cases are fact-specific, and other types of fraud involving check forgeries present different responsibilities and liabilities for all parties. HB
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